Investors are increasingly considering Environmental, Social, and Governance (ESG) factors hand in hand with a mining company’s financial performance. It isn’t just feel-good window dressing: a 2020 meta study from New York University’s Stern School of Business notes that there are consistent positive correlations between ESG and corporate financial performance and that “Improved financial performance due to ESG becomes more marked over longer time horizons.”1
Although the term “ESG” was first coined in 20041, it is far from a new concept for the mining industry. ESG dynamics in this sector are wide-ranging, complex, and inherently interrelated. When properly aligned, the “E,” “S”, and “G” mutually reinforce each other, creating more successful outcomes for companies, governments, local stakeholders, and investors alike.
Despite this, the “E” of ESG—environmental—has tended to get the lion’s share of attention from the media and investors alike. This has probably been warranted because of the increasingly prescriptive nature of environmental regulations and performance standards, especially with respect to mine tailings management and water stewardship. It is also a more tangible construct to study, assess, and address. However, civil society and activist groups are becoming progressively more focused on the social risks and impacts created by mining.
The International Council of Mining & Metals (ICMM) succinctly defines social performance as “the outcome of a mining company’s engagement, activities and commitments that directly and indirectly impact stakeholders, particularly the local communities that live close to mining operations”2. Getting such social performance right—the “S” in ESG—is critical, as mining operations and the communities and regions that host them are inextricably linked. Mining companies face a growing—and increasingly public—number of incidents involving human rights, engagement with indigenous peoples, the protection of cultural heritage, and diversity, equity, and inclusion. But there has been more progress than many realize, in part because as scrutiny increases, companies, developers, and mining operators have become more responsive to the growing global imperative to foster sustainable social performance and help create and protect community resilience.
The Beginnings of a New Paradigm around Social Performance
While they are not always given the credit they deserve, exploration and mining companies have been focused on monitoring negative social impacts and doing “less harm” for quite some time. On the other hand, for the most part, they have not proactively focused on creating long-term social value. Going forward, the mining industry will need to have a more human-centric focus with greater effort put toward managing their operations in ways that contribute to an overall societal net positive for host communities—or risk losing the ability to function in the countries in which they need to operate.
As a start, that will entail doing a more thorough job of properly identifying and mitigating social risks and impacts, while capitalizing on opportunities. Beyond that, a wider set of stakeholder concerns and expectations must also be identified, and managed, and socio-economic benefits distributed more equitably. And given the industry’s need to attract and retain diverse talent, company culture, values, and behavior must be aligned with being an “employer of choice.”
The Neglected Letter: Refocusing on the “S” in ESG
The “S” needs greater attention as, ultimately, sustainability is about humanity. Social performance, to a large degree, is necessarily focused on the mine site level, encompassing a wide range of local human rights, social welfare, health, safety, and environmental issues. Yet, despite its undeniable importance, social-related ESG issues continue to receive less investor consideration than environmental issues. This may be because climate change and decarbonization continue to dominate public discourse. Also, the “E” is generally easier to comprehend and quantify. For instance, the idea of “net zero” is an unambiguous goal; a project’s carbon footprint can be quantified and measured in tons of greenhouse gas emissions and success can be judged by clear, predetermined benchmarks.
By contrast, social risks and impacts tend to be a tangle of interrelated intangible positives and negatives, typically subjective, and often further complicated by legacy issues, linguistic complexities, intergenerational responsibilities, socio-economic imbalances, cross-cultural barriers, and ultimately the adaptive capacity of host communities. Success and a “return on investment” with respect to social performance can be difficult to analyze, let alone quantify, and often evolves over the life cycle of a mine, from early exploration to closure.
Still, social performance practices in the mining sector are steadily progressing. In the past, these admittedly had more to do with piecemeal CSR (Corporate Social Responsibility) investments and feel-good public-relations checklists, as opposed to day-to-day operational practice. CSR was more of a necessity with a hope of doing the right things, and doing those things right. But in an era where social media can turn a remote local conflict into an immediate global event, checklist-driven efforts do not suffice. And while the criteria may be complicated, in the end, getting the “S” right boils down to treating local and Indigenous communities or other rights holders with the respect and consideration we would want for our own communities, wherever we live.
It can be done, and when done well, the results of a robust “social contract” can be hugely positive and often transformational through economic multiplier effects. A mining operation can bring well-paying jobs, electricity, clean water, better roads, and access to education and medical services to regions that otherwise wouldn’t have them. By actively partnering alongside governments, international development partners, host communities, and NGOs, the mining sector can deliver extensive, lasting social-economic benefits that contribute to community resilience. Done half-heartedly, it can be disastrous. Fortunately, there are a growing number of evolving international social performance standards with associated guidance, coupled with country-level mechanisms, that are increasingly reflecting what is deemed to be “good practice”.
The Perils of Getting It Wrong
Even if it doesn’t get as much attention as environmental concerns, strong social performance is increasingly perceived as fundamental table stakes for mining companies and related stakeholders, including investors. Recent history has proved that lack of strong board governance with respect to social performance, coupled with reactive, transactional, or arrogant behavior can lead to a multitude of negative social outcomes including:
- Outrage over negative impacts, failed promises, and failure to deliver on shared benefits
- Increased distrust leading to inter- and intra-community conflict
- Exacerbation of wealth inequalities and social divisions
- A deterioration in the quality of life, psycho-social problems, induced poverty, and increased vulnerabilities
- Uncontrolled influx of migrants resulting in xenophobia, localized inflation, and pressure on social infrastructure
- Increased exposure to harassment and human rights abuses, including gender-based violence
At the local level, these outcomes can be devastating, undermining traditional values, social dynamics and cohesion, and overall community resilience. Broader consequences include significant downsides for mining companies, governments, communities, and investors alike, as the industry’s SLTO—social license to operate—is threatened.
Historically, mining companies had a primary focus on inbound risks to their operations from the community rather than risks to the community from their mining operations—and importantly trying to identify and understand community aspirations, concerns and also “outrage”, which is the intuitive (and emotional) reaction to such risks that in turn fuels the community perceptions. This one-way approach masked the root causes of company-community distrust and conflict and the inability to fully recognize, respond, and provide remedy to such community outrage has exacerbated the issue. The problem is thankfully now better recognized: for five consecutive years (2019 through 2023), “social license to operate” (SLTO) has topped Ernst and Young’s for mining and metals4. Social license to operate is the informal—but nevertheless essential—acceptance granted by stakeholders and based on legitimacy, credibility, and trust. Companies that don’t act fairly toward host communities and fail to achieve the SLTO at the beginning of a mine’s lifecycle—or lose it later—will often face a multitude of challenges from costly and unexpected delays or closures, negative social media and reputational damage, limited access to capital, regulatory noncompliance, inability to attract or retain talent, and much more.
Loss of SLTO can cause lasting damage to a company, and in some cases, the ramifications can be global. The mining industry’s collective response to such public social performance challenges is increasingly coming under scrutiny from governments, host communities, investors, and other civil society stakeholders.
Competent and responsible mining companies tend to understand the macro- and micro-socio-economic risks and impacts involved, yet many still struggle to succeed in social performance. This is often worsened as companies inadvertently adopt an inappropriate decide-announce-defend (DAD) approach to community engagement. The problem typically is not a lack of good intentions; more commonly, it is a lack of genuine expertise, boots-on-the-ground professionals who can execute, and the appropriate internal structure to ensure effective lines of communication between community members, on-site personnel, and corporate offices.
However, even the most benevolent planning process cannot take into account every foreseeable local issue, and there is often a variety of sometimes conflicting factors at play. For example, a company may try to proactively address environmental SLTO concerns by building a road around a town to protect residents from unwanted noise, dust, and traffic. But if the bypass road is built with outside labor, the influx of workers could strain local infrastructure and undermine other social performance goals.
There may never be a perfect solution to such issues, but with a comprehensive understanding of local impacts and issues, effective lines of feedback and open communications, and a management team committed to adding social value, compromises can be found that all sides can live with while the local community continues to enjoy the many economic benefits that a mine can provide.
Social Performance Due Diligence is Key
Resource Capital Funds (RCF) has been a signatory of the United Nations Principles for Responsible Investment (“UNPRI”) since 2013 and is focusing on incorporating ESG factors into its investment processes and activities to reduce risk, improve long-term returns, and create more sustainable businesses. While currently verifiable and robust social performance assessment lags environmental assessment and associated disclosures, gains are being made as the social stakes are increasing for miners across the globe. Despite many positive strides, the mining industry still has an SLTO challenge that cannot be ignored, especially in the post-pandemic world, as we face a cluster of interconnected risks that has been termed by the World Economic Forum a “polycrisis”. Looking to the future, the mining industry will have to intensify its efforts to capture and track appropriate qualitative and quantitative social performance metrics to help key stakeholders, including investors, make informed decisions.
After investing in over 200 mining entities, RCF understands the importance of looking beyond corporate sustainability reports, ESG rating scores, and corporate platitudes. Due diligence is fundamentally an investigation, or audit process, to confirm facts or matters under consideration, which is why specific in-house expertise and thorough research are needed to successfully evaluate a company’s true behavior and real performance against a myriad of social challenges.
Part 2 of this article, “The Path to Achieving Robust Social Performance in Mining” defines more specific measures and frameworks mining companies can adopt to further these efforts, along with practices investors should look for when evaluating opportunities.
Source of Data
1 NYU Stern, ESG and Financial Performance: Uncovering the Relationship by Aggregating Evidence from 1,000 Plus Studies Published between 2015 – 2020. https://www.stern.nyu.edu/sites/default/files/assets/documents/NYU-RAM_ESG-Paper_2021%20Rev_0.pdf
2 ICMM, ICMM publishes new tools to improve the mining industry’s approach to social performance. https://www.icmm.com/en-gb/news/2022/new-tools-to-improve-social-performance
3 Social Value Canada, What is Social Value? https://socialvalue-canada.org/what-is-social-value/
4 EY, Top 10 business risks and opportunities for mining and metals in 2023. https://www.ey.com/en_gl/mining-metals/risks-opportunities
This material is provided for educational purposes only and should not be construed as research. The information presented is not a complete analysis of the commodities landscape.
The opinions expressed may change as subsequent conditions vary. The information and opinions contained in this material are derived from proprietary and non-proprietary sources deemed by Resource Capital Funds and/or its affiliates (together, “RCF”) to be reliable. No representation is made that this information is accurate or complete. There is no guarantee that any forecasts made will come to pass. Reliance upon information in this material is at the sole discretion of the reader.
None of the information constitutes a recommendation by RCF, or an offer to sell, or a solicitation of any offer to buy or sell any securities, product or service. The information is not intended to provide investment advice. RCF does not guarantee the suitability or potential value of any particular investment. The information contained herein may not be relied upon by you in evaluating the merits of any investment.
Investing involves risk, including possible loss of principal.